One of the biggest rising financial trends is the use of a SPAC to merge with and take another company public. In 2020 alone, SPAC Insider recorded an excess of US$70 billion in gross proceeds from more than 200 SPACs. A special-purpose acquisitions company is a shell company that is set up solely to raise capital through an IPO to acquire an existing company. Formerly known as "blank check companies”, SPACs are not new to the market. They were called "blank check companies" because investors had no idea what company they would ultimately be investing in. They have existed for decades, operating as publicly traded companies that are used at the developmental stage. Merging or acquiring another company, their role includes fundraising and ensuring that the merging private company receives the SPAC’s place in the stock market. SPACs rose in popularity during the pandemic, as many companies postponed their IPO's due to market volatility. Instead, they merged with a SPAC, reaching a favourable agreement, gaining more capital, and going public swiftly.
The Lifecycle of a SPAC
Listing a SPAC is simple; the process begins by attracting a wide range of investors through an initial public offering to buy another company. The SPAC sponsor can apply for founder securities and can also purchase additional warrants/ordinary shares. They use their industry connections to source an attractive target company for acquisition. Investors range from individuals to private equity funds. SPACs have 2 years to complete an acquisition, before investor funds must be returned.
SPAC popularity and pitfalls
This capital raising trend has become a popular way for start-ups to access investment. It’s also becoming trendy, thanks to the celebrity and business mogul uptake. In the US, SPAC hit the headlines when former NBA star Shaquille O’Neill, Martin Luther King Jnr, and three former Disney executives combined to form Forest Road Acquisition Corp SPAC. They raised US$250 million to make acquisitions in media and technology. In Hong Kong, tycoons Richard Li and Adrian Cheng are popularising SPAC. Tycoon Li Ka-shing’s younger son Richard Li has backed Bridgetown Holdings, alongside PayPal founder Peter Thiel. Their SPAC raised US$595 million last October on the Nasdaq market, in Dec 2020, it is said the duo are in the early stages of acquiring a minority stake in the Indonesian e-commerce firm Tokopedia. Similarly, New World Development’s Adrian Cheng Chi-Kong is set to list an SPAC in New York with aims to raise up to US$345million in an IPO on Nasdaq.
Pros
• SPAC can avoid the uncertainties presented when using the volatile IPO market and provide companies with capital.
• SPAC sponsors are experienced financial and industrial professionals who can offer access to enviable network of contacts. They offer management expertise and can even open themselves up for board positions.
• Selling to a SPAC can add up to 20% on the sale price, compared to the average private equity deal.
• A SPAC merger doesn’t need to generate interest from investors in public exchanges via roadshows, so marketing costs are lower.
• Going public through a SPAC can accelerate a company’s market entry by months. There are fewer SEC comments, and the auditing process becomes shorter, due to a lack of financial statements.
Cons
• Target companies could see their acquisition rejected by SPAC shareholders.
• SPAC sponsors usually own a 20% stake in founder shares. They can also benefit from an earnout as they receive more shares when the stock price achieves a specified target over a certain time frame. This could lead to shareholder dilution.
• Complex registration and financial reporting requirements can prove troublesome.
• An accelerated SPAC public company timeline means that the target company’s management team must be publicly operational within 3-5 months of signing the letter of intent.
• SPAC sponsors have a deadline by which they must find a suitable deal, otherwise, the SPAC is liquidated, and all investors get a full refund with interest.
• Regions such as Hong Kong do not currently have regulations in place that allow SPACs to list. Nasdaq and the New York Stock Exchange accounted for 97% of last year’s SPAC funds.
One of high-profile SPAC mergers and acquisitions in recent years came via Richard Branson's Virgin Galactic deal. Venture capitalist Chamath Palihapitiya's SPAC Social Capital Hedosophia Holdings bought a 49% stake in Virgin Galactic for US$800 million before listing the company in 2019. Although he has since sold his remaining personal stake earlier this year, deals as such have generated major interest and bolsters the SPAC trend. They can produce massive pay deals for their creators and start-ups in emerging industries can capitalise in the lead up to the stock market. Investors, in turn, can receive swift access to promising new companies without the usual IPO scrutiny. The SPAC trend looks here to stay.